酷柏 (COO) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cooper Companies Inc., quarter 2, 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to your host for today's conference, Mr. Norris Battin, Vice President of Investor Relations and Communications. Please proceed, sir.

Thanks. Good afternoon and welcome to everyone. Before we begin, I would like to introduce you to Tom Bender, our Chairman and Chief Executive Officer; Bob Weiss, who is our Executive Vice President, and Chief Operating Officer; and Steve Neil who is Chief Financial Officer who will be reviewing the quarter with you this afternoon, and taking your questions.

Before we get started, I would like to tell you that this conference call contains forward-looking projections of the Company's results. Actual results could differ materially from these projections. Additional information concerning the factors that could cause material differences can be found in the Company's periodic filings with the SEC and these are available publicly and on request from the Company's Investor Relations department. As we are in New York City today, calls following the end of the conference should be directed to this number, should you like to make a note of it. 212-418-7842. I'll do that again. 212-418-7842 and with that, I will turn the call over to Tom for his opening remarks. Tom?

Thank you, Norris and welcome, everyone. We'll follow the same format we have had -- we have followed for the last few conference calls. I will turn this over after I'm completed with my opening comments, and reviewing some of the highlights of the quarter to Bob Weiss, who will then refer some of the financial highlights to Steve Neil.

So as we get started, let's talk about a couple of points that I think we should focus on. Number one is in the area -- with CooperVision, as far as the integration process is concerned, I would hope you can see from the results of this quarter, that we are well ahead of where we thought we would be at this time. Our -- our SG&A expenses, percent of sales I think reflect that. As an example, we have begun to completely close out the Huntington Beach operation, that will be resolved by the 1st of July. Albuquerque is next. And most of the other integration is concerning sales and marketing, have been addressed, and I think the efficiencies that we were looking for are certainly coming to pass. On top of that, our gross margins, as you can see, are doing very well. The impact of Gen 2 across all the Ocular product lines are certainly coming to our expectations and quite frankly are ahead of where we thought they would be. So in those two areas, I got to tell you, that we're very, very satisfied.

As far as the results in revenue, I will focus upon the product lines by a worldwide basis, as well as U.S. First of all let me talk about the market conditions in the contact lens industry. From a geographic standpoint, the market is up almost -- for the quarter. I'm talking about the first quarter, almost 12% in constant currency, about 8%. The Americas on a global -- looking at it from a total market standpoint was up about 10%. Asia Pacific was up in constant currency about 14%, and the only weak area was Europe. Europe was actually down about 1% in constant currency.

If we look at the U.S. market, the U.S. market, we just got data in, in fact in the last two or three hours on the U.S. market was up 9%. The torics market was up 7%, by the way. And the disposable market for torics were up 9%. Sphere's were up about 10%, and the multifocal product line in the U.S. was up 20%.

Let me talk a little bit about from a pro forma basis and I will speak only to pro forma. On our performance not only on a worldwide basis but in the U.S. Speaking first about Sphere's, our Sphere's represent about 60% of our worldwide business. Worldwide, our business was up 4% for Sphere's and our disposable business, which represents -- disposable Sphere's that is represents 90% of all of our Sphere's was up 7.5%. Our conventional Sphere's, which represents 10% of all of our Sphere's was down 20%.

In the U.S., where we have our -- our definite weakness, revenue weakness which we have stated before is related to the weakness in the two-week disposable Sphere product lines from Ocular Sciences was down 7%. That's 50% of our U.S. business by the way are Sphere's. The disposable business in the United States or disposable Sphere business I should say was down 4%. And disposable Sphere's represent 90% of all of our U.S. Spherical business. Conventional Sphere's were down 32%, that represents 10% of our business. If I look at it from an international standpoint, of our Sphere business, it was up 11%. Our disposable Sphere's internationally which is 92% by the way of all Sphere's was up 13% and conventional Sphere's which represents 8% of all of our Sphere's on an international basis was down 12%.

Let's review -- let's get to the areas of our strength of this company and has been. That's our toric business. On a worldwide basis, our torics were up 18%. And the market, by the way on the global basis in the first quarter was up 12% for torics. So we, again, are outperforming the market and gaining market share. By the way torics on a worldwide basis represents 33% of our total toric business. When we look at the disposable part of our torics, on a worldwide basis, it was up 33%. And it's 76% of all of our torics are disposables. If I look at the market, the worldwide market for disposable Sphere's were up 20%. So, again, we're outperforming the market in the disposable Sphere's side of the toric business. Our conventional torics were down 13%, and represents 25% of our business.

Let me review now -- refer to the U.S. market. Our torics in the U.S. were up 11%, with a market that was up 7%. Torics represent 45% of our U.S. business. Our disposable torics were up 28%, and that represents 70% of all of our toric business. The market was up 19% for two-week products and 10% if we put two-week products and monthly products together. So, again, we are well outperforming the market. On the other hand, our conventional torics were down 14% in the quarter, that represents 30% of our toric business in the U.S. And the market in the U.S. was down for conventional torics 8%.

If I look at our multifocal business, again, we're taking market share not only worldwide, but in the U.S. Multifocals the worldwide market, for our multifocals were up 41%. The overall market for multifocals on a global basis was up 19% in the quarter. In the U.S., our multifocal business was up 33%, and if we look at the U.S. market for multifocals in the first quarter, the market was up 20%.

More importantly, let's revert now to the ProClear product line, which continues to grow in the face of the two silicone products, silicone Sphere products that have been introduced in the market over the last 18 months. Our ProClear product line grew 30% worldwide, 30% in the U.S., and 31% in the international markets. Our specialty business worldwide was up 16%, 20% internationally, and 12% in the U.S. Specialty products represent 60% of our U.S. business, and almost 50% of our worldwide business.

All disposable products, which represent 85% of CooperVision's business, was up 15% worldwide, 19% internationally, and 8% in the U.S. If I carve out, as I have told most of you I would do, if I carve out the impact of the two-week Biomedics disposable Sphere business, all the rest of our disposable business was actually up 20%. Let me speak for a couple more minutes about silicone hydrogels and the impact on CooperVision thus far. As most of you know, silicone hydrogels from Johnson & Johnson were introduced a little bit over a year ago. I think about 17 months ago.

Ciba Visions product 02 Optix was introduced, I want to say about October or November of '04, but really wasn't begun to be promoted aggressively by Ciba until the first quarter of this year. The interesting thing is when you look at the data and the impact of what has happened, be aware that both of these products compete in the -- basically in the U.S. in the two-week disposable Sphere market. And what we have seen is the impact from Johnson & Johnson, the tradition, from transforming their hydrogels, their normal hydrogel products which was Acuvue 2, and Acuvue, into Acuvue Advanced which is the silicone product. So the silicone product was taking market share away from their own product. Ciba's product, and by the way, before all of this began, that is the first quarter of '04, J&J had about 55% of the two-week disposable Sphere market in the U.S. By the end of the first quarter, of '05, their market share had eroded to about 46%. The pickup of that market share, in that market segment, was from Ciba Vision's 02 Optix, which was gaining share, basically from J&J.

In the meantime, Cooper and Ocular together, their market share in the two-week disposable market in the U.S. basically had no change. So we have come to the conclusion that the basic problem we're having with our two-week disposable Sphere is in the U.S. It's certainly not tied to ProClear and it's tied basically to a involvement with a large amount of inventory that we had been working off that had developed over the year of 2004, as Ocular Science attempted to move Biomedics users from their old Biomedics product to Biomedics Premier, which is their spheric product. During that process, instead of working off of inventory of the old Biomedics product, they have actually began to build excessive amount of inventory which of course, we have been working off.

We do believe that by the end of this following quarter, third quarter, most of that inventory will be worked off. We are monitoring using health product research data on a monthly basis. Any change in our market share, based on these silicone products. At this point, I must tell you, I don't see any impact of the silicone products on our core product in this category which is, of course, our ProClear product. I think with that, Bob, I will just turn it over to you. I think I've spoken long enough.

Thank you, Tom and good afternoon, everyone. As the headline indicated, our revenue was up 79% above the prior year on an historic GAAP basis or with revenue $216 million, and our earnings per share was $0.81, excluding nonrecurring items, and I might point out that that includes $0.05 or $2.6 million that was reported in the P&L due to an effective hedge in the form of an interest rate swap that did not qualify for hedge accounting as of the end of the first quarter, and we -- or the second quarter, we will be putting in place effective accounting hedge accounting in the third quarter. As far as the drivers of CooperVision -- one other highlight I want to make sure I call out is cash flow. I don't want to gloss over that. Cash flow for the quarter was a record $43 million in operating cash flow, bringing our year-to-date operating cash flow to $80 million and clearly, I'm feeling very confident in the $165 million number in terms of operating cash flow we have thrown out there in the past. That's a conservative number and, we're feeling outstandingly good about operating cash flow.

The drivers of our business. CooperVision top line was up 99% above the prior year and in constant currency, it was 94%. Our specialty lenses were up 51% on a GAAP basis, accounting for 48% of our overall vision revenue, and torics were up 54% and accounts for one-third of the CooperVision revenues. One-day disposables which of course we did not have prior to the acquisition of Ocular, recorded $22 million in revenue. The real driver of the CooperVision franchise is the ProClear family of products which is $100 million product line, for which it was up 30% worldwide, 31% in the United States -- outside the United States, and 30% in the United States. Other drivers clearly are, on a pro forma basis, our toric franchise is up 18% worldwide, 28% internationally, and 11% in the United States, and our specialty lenses, as a family were up 16% on a pro forma or organic basis if you will worldwide, 20% internationally, and 12% in the United States.

The second family that we have that is approaching -- I won't call it family. The second product line that's approaching $100 million mark is also the one-day lens. Having recorded the $22 million in revenue during the quarter. As far as geographic mix, one of our agenda items in the Ocular acquisition was to -- to take advantage of the growth in the Pacific Rim and typically in Japan market. And if we put together the two businesses, we, prior to the acquisition, had 5% of our revenue was tourist in the Asia Pacific market that then jumped with Ocular to 14% on a pro forma basis. And that organically has grown from 14% to 17%. So our strategy is proving successful. During the quarter, growth in the Americas was 72%. Europe 86%, and Asia Pacific was up 5.5 fold. So one of the key drivers to the acquisition is certainly working very well.

As far as CooperSurgical its reported, revenue of 4% on a GAAP basis. On a pro forma basis or on the basis of promoted products, which, of course, we realigned the sales force, are of course investing money in building a larger national sales force, believing we could stimulate growth and that part of the product line the non -- the core product line grew 9%, that excludes the non guiding piece of the product line as well as certain products outside the core. For example those products that are non promoted products into the hospital arena. So we are happy with the success of the recent restructuring of our sales force within CooperSurgical. Overall CooperVision -- The Cooper Companies had revenue growth of 79% and once again, 75% in constant currency, and on a pro forma basis, worldwide, or organic growth basis, we are up 9% above the prior year.

Just a couple of other comments. The integration is going well and the $60 million of expected synergies, we still are very optimistic that we will achieve that mark, and in fact exceed it. And that we will get there sooner rather than later. One of the reasons, as we guided our top line down, and did not guide our earnings per share down is the fact that the integration is doing very well. Of course one other reason for guiding revenue down recently, is as we all know the dollar has strengthened about 5% against the euro, 5% against the pound and about 4% against the yen. As we are a much more global company now, that has impacted our overall revenue line by about 2%. Of course, that's not unique to Cooper. That is just the way it is out in the marketplace.

We remain -- in the past we have been recently challenged as far as the impact of foreign exchange or currency on the top line and bottom lines. We are still balanced; although, quite frankly with the Ocular transaction, we are a little bit more dollar based as we make more and more product in Puerto Rico, albeit at a cheaper rate. We are not at all panicking over the strengthening of the dollar but our past automatic hedge is a little bit more out of synch than it has been in the past. As far as the driver of -- why the bottom line is holding so well, one of the key drivers is the gross margin. When we initially gave guidance, we were expecting the merger of Ocular with Cooper, Ocular bringing in 60% gross margin and Cooper having a much higher margin of 64.4. We've weighed out to around 63%. In fact we are running at 64.5%, and that was our target for the third year out. So we are ecstatic about Gen 2 efficiency.

We of course took certain actions to integrate certain weighting facilities we now shut down in Huntington Beach and Albuquerque. Two of our latest facilities and that consolidation is proceeding ahead of schedule. The other thing that should not be missed is the fact that while some of our product lines, the commodity end is doing less well, the premium end or the specialty lenses are doing very well and that's another favorable mix on our gross margin that will continue as we trade up from commodities, if you will, to specialty lenses. I think I have probably said enough about that right now and I will turn it over to Steve who will talk about the operating income on the call.

Thanks, Bob and welcome everybody. Just to summarize real quickly on the top line, as Bob indicated sales up 79% on a consolidated basis, 75% constant currency. Again, that was led by the Vision Group, which is significantly impacted by the Ocular Sciences acquisition in January. On a year-to-date basis, sales are up 58% and just the top line for the Vision Group, sales increased 99% in the quarter, and 71% year-to-date. And on a constant currency basis that's 94% and 66% respectively. And then, the Surgical Group, sales increased 4.3% in the quarter and that was all organic growth, on a year-to-date basis, sales grew 10% in the Surgical Group and that's 7% of an organic basis.

On gross margin, gross margin, as reported, was 60.6% and excluding nonrecurring expenses, principally acquired inventory step-up, the gross margin was 64.5%, as Bob noted and this compares with 65% in the second quarter last year. And then on a year-to-date basis, gross margin was 61.4% or 64.3% excluding the nonrecurring items and that compares to 64.4% last year.

Looking at the business units, the Vision Group excluding nonrecurring expenses, gross margin in the quarter was 65.7%. And that compares to 67.7 last year. And on a year-to-date basis we were 65.8%. And the gross margin decline from last year is primarily due to the product mix as a result of the Ocular acquisition. And overall specialty sales have declined from 64% to 48%. Although quarter on quarter, specialty sales has increased from 44% to 48% of our sales. For the Surgical Group, gross margin was 56.3% in the second quarter, and that compares to 55.2% last year. And on a year-to-date basis, 55.7%.

Looking at operating expenses for the Company, 41% of sales was the total operating expense in the second quarter, and if you exclude the nonrecurring expenses, it's at 40%. And that 40% compares to 42% last year. On a year-to-date basis, 42% and without excluding items that's 41% and, again, comparing to 42% last year. So the percentage decrease is really focused on the integration activities. This is despite an increase in R&D of $4.1 million in the second quarter, as we invest in new product development and product enhancement and that's predominantly focused in the Vision Group. And we have significant leverage as a result on our greater sales level. So certainly, feeling that going down to the bottom line. And looking at the operating margin, despite the increase in R&D, and slightly lower gross margins our operating margins, excluding nonrecurring expenses were 24.7%, and that compares to 23% last year.

Now as a result of the debt incurred in the acquisition our interest expense increased 6.6 million over last year and represents 4.3% of sales. So that certainly is a difference between years. In other income, as Bob mentioned other income includes 2.8 million, representing approximately $0.05 per share, for an effective economic hedge in the form of interest rate swaps that did not qualify for hedge accounting. We expect that the swaps will qualify for hedge accounting in the third quarter. The impact going forward will be that the income recognized in the third quarter will reverse over the three-year period of the swaps. As a result of these interest rate swaps not qualifying as a hedge, the Company is remediating its hedge accounting process and this failure to qualify for hedge accounting treatment may result in a material weakness and internal control. Remediation efforts are focused on that. Due to management's ongoing review of the situation, we may be delayed in filing our second quarter Form 10-Q.

Looking at the income taxes, effective tax rate excluding nonrecurring items was 20%, and that's 1% less than in the first quarter, and so it resulted in effective tax rate excluding nonrecurring expenses of 19.4% in the quarter. The effective tax rate, including nonrecurring expenses is projected to be 21% which is consistent quarter to quarter. That all sums up to net income of $27.3 million or 58% per share as reported and excluding the nonrecurring items, it's 36.2 million and $0.81 per share. This compares last year to 21.7 and $0.61 per share. Year-to-date, similar were net income at $1.06 per share, and $1.35 per share, without the excluding items.

Let me focus for some moment on the balance sheet because, again, as Bob mentioned we are really pleased with our performance on the balance sheet. DSOs were 62 days, which is comparable to last year at 61. Last quarter was 65. And we expect really for the balance of the year to be really in the low to mid-60s. So continue that trend. Months on hand in inventory were 6.7. That compares to 7.3 months on hand last year and 6.8 in the first quarter. And, again, we expect to remain in the similar quarter's levels for the balance of the year. So, again, good performance in our key working capital areas.

When we look at capital expenditures, they were 27 million in the quarter and were 39 million year-to-date. We expect approximately 115 million to 125 million for the year and this really is focusing on capacity and cost reduction initiatives that we have going. Overall our net debt and that's cash -- or debt less cash on hand, we reduced it over 13 million in the quarter, reflecting favorable working capital management, as I noted and increased profit. And it results in total debt-to-cap, reducing from 39% at the acquisition date down to 37% here at the end of the second quarter. As Bob noted our cash flow from operations for the quarter was a record, 43 million, and 80 million year-to-date with free cash flow and that's cash flow after capital expenditures of 41 million for the first half of the year. All that sums up to second quarter cash flow per share, growing $0.36 or 42% over last year to $1.22, and the trailing 12 months of cash flow per share is $4.02. So significant cash generation and focusing in on the balance sheet. I think that's enough numbers for you right now. I'll turn the call back over to Tom for Q&A.

Operator, we will be ready for anyone who would like to ask some questions please.

Thank you, sir. [OPERATOR INSTRUCTIONS]

Steve Hamill please? Steve?

Yes, thank you. I guess as a first question, I was wondering if you could talk about the gross margins and what impact, if any there might be as you -- I would assume have to kind of cut back a little bit in terms of your production levels on the Ocular side, so that you don't build up a bunch of inventory. Could that hurt absorption and harm gross margins down the road? Is that --?

No, I don't think so but I will let Bob answer that?

Certainly if anything, no, we are not cutting back on production, and as an indicator, the spend of 115 to 125 million in CapEx indicates that we are behind the eight ball in terms of having the capacity to make both the one-day product, which we can sell a lot more of, as well as our ability to convert and put more lines in more production. So with our growth rate, we are not at all concerned about building up inventory and then, of course as we realign things, by that I mean if we convert products from one type of production to another, yes, we will build up a bumper stock to prudently bring about that conversion. So over the next two to three years, there are going to be times, as we are shutting down a plant, let's say, and moving to another site, where you build a little and then it works its way down, no one big pot but I think there's awful lot of activity over the three years. However, to answer your question, building up stock is not our concern at all right now.

Okay. And then can you talk a little bit -- it doesn't get much attention often but the surgical business which seems to be weaker than expected and I know you have spent quite a bit here on sales and marketing. Do you see that turning some time soon?

Well, as I -- as I indicated, the surgical business grew 9% in its core area, the core area really is the products that -- if you think about where we have our sales force. Our sales force is primarily in the field, calling upon gynecologists in their office practice. We have both a technical group as well as a relationship group. We are happy with that progress. We are happy with those products that fit the core strategy, and products such as incontinence and infertility are doing very well and to our satisfaction. Where we are losing on the revenue line, it doesn't surprise us in the area of the non-gynecology business. For example there was one area where we had some sales on a franchise return but we had a niche area where we were selling colposcopy into the criminal market place, for example, in New Jersey. Well, that market has pretty much been shut down and so you are seeing a lot of declines in some of those non-core -- by non-core, I mean not that -- a colposcope business isn't a women's healthcare product. I do mean issues in rape cases and things like that are becoming less and less existent and nothing worth promoting.

Okay. And then if I can ask one last question and I will jump back in the queue. In general, as you think back to your due diligence on the deal, why would the excess Ocular Biomedics inventory in the channel have not popped up and could it have been because of the influence of competitive products that maybe the new Biomedics product they were putting out there was not taking off as expected?

I will make a first comment and then I will assign Tom to add. There's a philosophical difference between the way Cooper marketed -- markets its products, and the way Ocular did. Ocular you may recall, came from a background where they used extensively what they would call an inside salespeople, and then evolved to a external sales force. Their product and their approach was very much a push it out there approach. Get it out to the marketplace, and then the marketplace will take care of further distributing it. Cooper is much more from a background of RX, because of its specialty lenses and, therefore, had a much more philosophical approach of hold to make sure that the demand is created and then pull that hold. What you have is a shifting, as Cooper moves more and more to a full strategy compared to the push strategy, let's see how much product we can get out there in the pipeline that difference which is contracting itself out over the last -- it will probably be a 12-month cycle of that contraction. But philosophically we believe that it's a much healthier model, if you will, to make sure the product is going out the door on eyes created by the demand on eyes.

I can't add a heck of a lot more to it other than, I think, Steve, we have certainly been trying to monitor the history of what has been going on because there's been a perception that the silicon hydrogels from both J&J and Ciba has had something to do with this weakness in the two-week market -- or I should say in the disposable Sphere market in the U.S.. This is a U.S. issue. It's certainly not a international issue as I think I tried to point out with the overview of our business in the Sphere market over this past quarter. But looking at the HBR data, which any of you can purchase if you want and you go back in time, you can see exactly what was going on over this last couple years and that is that ProClear was gaining market share in that market segment, from, in fact, Ocular.

In the meantime Ocular was trying to move their product line from more of a commodity line which was the Biomedics line, into a product line that it had some value added to it and that was why they introduced Biomedics Premier which is no more than a Spheric designed product. Their intention was to move patients -- their patients from Biomedics to Biomedics Premier. This is no different than what J&Js done. Very smart strategy they're trying to do too. But in the meantime, instead of working down inventory, Cooper was doing a pretty good job of taking some market share away from them, and at the same time, they were selling in to their customer base, Premier -- I should say Biomedics Premier. Which indicated a much stronger inventory in the marketplace.

This -- this market is not as sophisticated as the pharmaceutical market. So you can go into the market and find out exactly what kind of inventory levels you have. You just can't do it. It's just not available. When I was at Halligan we sure had to do that very simply by monitoring Mckesson, Bergen, all your drug wholesalers. You knew what the heck was going on. It's pretty difficult to do in this industry. So said that that's really what's going on. We do believe that we have at least 5 to $10 million of product that we have to get out of the pipeline, before we feel better about it. So -- and that's primary reason we lowered expectations and it was all from there.

If you look at our core business, I will tell you what I will stand by. We are gaining market share. Every segment of the country, in the world I should say, in every one of those segments we play in, whether you want to talk about multifocals, torics that's where the market is, and -- or that's where our strength is, and it's not that we are weak in the Sphere market. We haven't talked too much about the R&D pipeline. But if you take a look at the R&D pipeline that we have now published we are focusing on building not only a silicone franchise but more importantly, our PC franchise, with new ProClear products, as well as the silicon hydrogel technology. And the flow of products which we are going to marry into our PC technology when it's appropriate. And that's what you see in that layout of new product launches we have planned from 2005 -- the end of 2005 to 2007.

Thank you.

Joanne Wuensch, Joanne are you there?

This is actually Jessica in for Joanne. I was just wondering if you can give a little bit of color on Cooper organic revenues and what the contribution from Ocular was.

You are talking about breaking apart the two pieces between Ocular and Cooper, and quite frankly, our system is so integrated globally that we would be purely guessing. We don't have any visibility of that, other than to say that a lot of what we are doing is -- well, it's going a little two ways. There are some products where we pick Ocular as the primary product and many where we pick Cooper as a primary product. So we are working quite diligently at -- if you will, shifting the product from one line into the Cooper line or vice versa. The long and the short of it is I think if you were to split the two out, the Cooper piece would clearly do better than the Ocular piece in aggregate but I have no clue on what the numbers are.

Thank you. And can you -- you talked a little bit about Japan. Can you maybe elaborate on how the restructuring and the building the sales force and everything is going in Japan?

Do you want to take that?

Well, of course we have -- when we bought Ocular we bought a fairly large franchise in Japan which is approaching $100 million, which has a fairly large sales force. I don't know, Steve, if you --?

65 sales people on the street in Japan.

And our strategy is that of where -- a spoke, where there is a number of players not only the Ocular Company that we bought, but we are retaining our partnership with Rotta for example, and as you probably know we also have a relationship with Menacant and a couple of other companies that have product lines there, to and including Menacamia (ph) ADL, has some sales there. So that strategy -- as indicated when I commented before we grew from the preocular point where we had 5% of our global sales in the Pacific Rim to 14% following the Ocular acquisition on a pro forma basis and are now at 17% and that -- that was done over a very short period of time, of four months. So suffice it to say, we are very pleased with the overall strategy, and how -- how that is rolling out.

Okay. And one last question. Can you just comment on how you -- if you think there will be any impact to your business from the launch of the PureVision toric?

Well, the PureVision toric has been available for over a year in Europe, I know that. Our our European business certainly has not been impacted at all, our toric business. We continue to gain share in Europe, even where PureVision exists. I thought it was interesting in the Bausch & Lomb conference call that management was asked a specific question in how well it was doing and what percent of their toric business was PureVision toric and it was interesting to find out it was only 10 to 15% of their own toric business. Be aware that my personal opinion is that they should do pretty well in this country, because there is a tradeup factor here involved and that's why I was somewhat surprised to see it was only 10 to 15%.

When it comes to fitting a patient, if you have a lens design that is very similar, or the same as your current lens design, it's very easy for a doctor to switch a patient from one product -- a step-up product from the current product the patient is wearing to another one. And the SofLens 66 toric is my understanding, and PureVision toric has basically the same design, same lens design. So it should be a fairly simple process to move a patient from one product to another. So therefore, I find it a little puzzling it hasn't happened that rapidly in Europe for B&L because there certainly would be a financial gain for them to move people, it would seem to me to the SofLens 66 toric to PureVision toric.

On the other hand, I will point out something that I think you can do your own due diligence on by talking to doctors that you may know or practitioners, I think they will tell you the same thing that especially when it comes to specialty lenses, the decision from a doctor to move a patient from one product to another, is going to be a little hesitant. I don't think they're going to do that very rapidly like they might want to do with the Sphere in making more profit in a practice. I don't think that they are going to do that with specialty lenses or even multifocal lenses. So I think that could be a way of explaining why PureVision toric hasn't taken more -- hasn't done as well maybe as I would have thought they would have done in Europe. The Acuvue product has been available for quite a while here. I say quite a while, four or five months and you can see with our results we don't believe it's had much impact. Again, it doesn't show up that well, either with -- with the data that is available.

Thank you very much.

Peter Bye?

Thanks, Tom. This is Don. On the inventory issue, you had mentioned that in early May and then currency only accounts for about 4 million of the drop. Can you give us a little color on where you have identified the problem, which accounts, and how confident you are, it's 10 to 12 and if it is 10 to 12, what do you think it was in early May?

Well, first of all, it is in the U.S. and we've spent a fair amount of time trying to come at it in a lot of different ways. We think we are getting a better handle on the size of that which I will describe as a push-pull where two factors not only the velocity that Ocular had of basically pushing it out there but secondly, they converted to the second product line last year from Biomedics to Biomedics Premium and you ended up with two product lines that we're -- they are certainly different, but they kind of play into the same space. So I think some of that shrinkage is going. We've been -- all I can say is we monitor it almost daily in terms of our analysis. We think based on some models that there's a flushout point which will still impact the third quarter that is clearly built into those numbers as far as spacing down in the fourth quarter and pretty much as we enter next year, we should be out of it as well.

Right. The question was -- I mean, you had mentioned this in early May. What -- and only about 4 million of the reduction in revenue was due to currency, so is this all an increase in the last three, four weeks of inventory you found or can you just help me with that.

Well, the system is not out there where you can go and see it. The -- I think Tom has commented a couple of times that we don't have that level -- this is not a pharmaceutical industry where you can track through the middleman drug wholesalers, what's in the pipeline. It's not a contact lens solution or a lens care products line where you can do the same thing.

I understand that. The question is just what is the delta between early May and today on the revenue ex-FX?

Well, you correctly did the analysis. It was $7 million in the third quarter, and it's about 2, 3 million in the fourth quarter and what's gone on is obviously we have a month of more work that we've put our attention on that and we have analyzed it as many different ways as we possibly can.

That 7 million in incremental in the last four weeks that you found.

That's correct.

The concern would be if you keep looking, what are you going to find in another four weeks? How much more confident are you today than you were four weeks ago that you -- that you have gone in and found everything at the customers?

It would be a gross overstatement to think that we have gone in and could see it. So we are dealing with a model, we are dealing with every data we can get together, including HBR data, including PLI data, a full series of data and looking at our product trends. We don't have the luxury of what it is you think you are --

Right.

We are trying to find.

Okay. And just -- on the gross margin front, on maybe your forward guidance, what -- silicone hydrogel is a little bit more expensive to manufacture; is that correct? And what are you assuming perhaps then on the conversion of once you -- you get those products out in Europe next year from a contribution on the top line, and how that might work through the gross margin in EBIT on the assumption?

Well, it's clear that the silicone hydrogel, particularly depending on the manufacturing technology will be by and large more expensive than many products out there. It's also clear that you get a premium for this silicone hydrogel so by the time you get to the gross margin, it isn't like there's a deficiency factor and if you look at the model that's been run so far be it changing from Acuvue to going to Acuvue Advance. Or Ciba with 02-Optix. They are not -- they are trading people up. Getting more revenues per patient. And it's not necessarily handicapping the margins. Having said that, there is the first phase will be to get a product. The second phase will be to worry about how you get the cost down and that's just the natural evolution of most new products coming into the market.

I would say, this is Steve Neil, I think the impact on margin as we look forward into next year, when we have silicone hydrogels is not going to be silicone hydrogel influenced to the extent that the successful integration that we are doing, that impact that we are going to have on the gross margin line. So if there is margin improvement, I think most of it is not going to be silicone related.

Okay. And just maybe -- maybe on the revenue line, when can we see some more tangible benefits from sort of your four-pronged strategy in Japan/Asia to maybe offset what is going on here in the U.S.?

Peter, that's going to be a 2006 event. As we get products through the cocesia (ph) that will determine how successful we are going to be. I think I have told you once before too, the other thing that has held us back this year, we haven't talked much about it is the cash fee for our daily disposable. We could certainly do much better in the Japanese market in the daily market if we had the capacity to manufacture more daily disposables there. And by the way that's another reason why the inventories, the amount of month on hand inventories is lower than it was last quarter, but really when you start comparing it for last year and this year we just don't have a lot of inventory of daily disposables. We will be in a position by the end of 2005. Calendar 2005, to be in a position to manufacturer all of the daily disposable product we are going to need and that will allow our partners to begin to market those products in 2006 in Japan.

You will actually have the plan up and validated by the ed of this calendar year instead of --?

With those lines, have already been ordered, some of them are already in. But we're not going to be in a position to really accelerate -- or I should say to address all the potential orders we have. We could get our daily disposables until the end of this year.

That's right. And it's not a plant validation issue, Peter. It's just installing the production line.

Is that earlier than what you had told us before because I seem to have thought mid '06 was when it was going to be?

No. If I made it earlier, it isn't earlier. It's about where we always expected. Somewhat frustrating. We think we are walking away between 40 and $50 million this year if we would have had those -- or those lines would have been in place but they are not and that's just the way it is. But we will have them for next year. What I think you might be confusing is that we are going to have the ProClear, the daily disposable, we will be launching the ProClear daily disposable by the middle of next year. And that is not a capacity issue at this point. It's more of having the product ready to go.

I will jump back in queue.

Suey Wong? Suey?

Let me just quickly jump back to the excess inventory issue. I just wanted to make sure I understood where the incremental excess inventory was found. Was this more of the practitioner channel, or it's more of the chain channel?

No, it's in the practitioner, Suey. As you recall, about two-thirds, at least two-thirds of all of Ocular's two-week daily disposable business is private label, basically more chain dominated. So most of this product we are talking about was identified as being in the independent practitioner market. Go ahead.

Tom what is your level of confidence here in your current estimates of the excess inventory?

My level of confidence, Bob certainly a lot higher than it was before. I don't want to make light of it, but it -- we certainly believed that we have it right this time. As I pointed out the core business -- again, I will come back, our core business remains strong. Whether it's our torics our ProClear product lines, multifocal and, quite frankly, our -- the rest of our product lines, even the Ocular product lines outside the U.S.. This is a U.S. issue and I think we have now addressed it, and I feel much more confident than I have ever did. That we've identified the worst case scenario. I don't know if that's what you were looking for.

You said this is a U.S. issue, right, it's not international issue.

It is a U.S. issue.

And then just one last question here. Can you talk about the interest rate swap and the hedge accounting situation? Can you go into some of the basics there?

Yes, I will take that one, Suey. What we put in place at the beginning of the year was some derivatives to fix a large percentage of the variable rate debt that we issued in conjunction with the Ocular transaction. It is an effective hedge. By that it means we are matching amounts and timing. FASB 133 which I have gotten to become more familiar with than I ever thought I would even attempt to get familiar with, is highly technical, and more on the documentation side. While economically we have an effective hedge, no arguments there, there are some very, very specific documentary hurdles effectively that you have to go over. We actually engaged experts to help us with this and frankly, we didn't cover all the hurdles that we should have covered. We identified that in the quarter. And we're in the process of making it an effective hedge.

The result, of course, was the 2.8 million and the $0.05 a share impact. But a hedge can be -- because the documentation is so specific and the requirements of FASB 133, it's just a very detailed. Last time Cooper put in an interest rate swap was back in 1997, and so it's not something we do every day. We thought we had it covered. Discovered we didn't, and we're now in the process of getting it covered.

If your site gets accepted next quarter, does that mean that $0.05 gets reversed?

Ultimately the $0.05 will turn but that's over a period of time because you are matching cash flows so -- and the hedges go out for another 2.5 years. So the impact is really this quarter, you are going to see nominal impact. We wouldn't even change any estimates, as a result of the turning of that hedge.

Great thank you.

I will just add one thing to that, that from an economics perspective, with 85% of our debt now is fixed versus variable, those hedges that we were able to get in place are pretty attractive, certainly as our bets, if you will proves correct that the costs to money would go up which is what caused the $2.8 million gain, of course. From a financial perspective on the guidance, we are feeling pretty good about the overall impact on interest expense, given that we have locked in. We always -- when we did the Ocular transaction, had a bit of a -- I won't call it a fudge factor but certainly a factor built in for the concern that rates were pretty low and how high they could get. The hedges that we locked in are below what we had built into our model. So there actually was a upside that was built into the numbers as a result of the economic benefit of this hedging.

Thanks, Bob.

Ulrich, Benner, please? Ulrich, are you there?

Benner Ulrich. Most of my questions have been answered. I guess one thing I wanted to touch on, with respect to the top line, what are your assumptions for currency trends going forward? And is it possible that, we have a situation next quarter where you would change guidance again, if either the trends reversed or if things went further in the direction that they have headed over the past four weeks?

This one was very simple. The dollar, as you know did a -- between the French vote, it really strengthened against three currencies. The strengthening was significant, and overall it impacted our revenue line 2% negatively. While that doesn't do that much -- the bottom line, it's not a big deal, certainly our assumption is we are not in the business of forecasting where currency rates are going to go and so when we give guidance, we will always give guidance, based on where we are at that point in time. If the dollar decides to go back the other way, then that, obviously would benefit our revenue line with no big deal on the OI or our share basis. If it goes and continues to strengthen, well, then obviously, us and the entire marketplace will shrink as the dollar shrinks.

Right. Understandable. But I guess my question was. If this reversed itself over the course of the next quarter, would you reconsider guidance again next quarter?

Sure. Absolutely.

Okay. Fair enough. And then the second question I had was just a quick number. What was the cost of sales number, if you back out the inventory and the other nonrecurring items?

The percentage?

54.5%.

Correct.

No, the -- if you had the total dollar value?

I'm sorry?

The just the -- in dollars? The cost of sales.

Oh.

Wait a minute, I got it right here. No, you got it. Right there.

The cost of sales number excluding the nonrecurring for the quarter was 76 million 522 and for the year to date excluding nonrecurring is 129 million 703.

Okay. That makes sense. Okay and that's -- I will get back in the queue. Thanks.

Chris Cooley?

Can you hear me okay?

Or Cooley Chris? Chris, are you there?

I'll answer to whichever one.

Oh, I feel so bad. I don't know where my head was.

Just a couple of questions if I may. One, go back to the inventory item, yet once again. Could you help me better understand how -- I guess, the question would be simply this. Have you changed your thought process in terms of what level of inventory needs to be maintained in the respective channels both within the independent practitioners, distributors, and chains? Has that affected your forecast as you are looking out going forward at all, or is this inventory that you -- as you alluded to earlier just was excessive after you were able to determine that it was excessive. I'm just trying to get a feel if anything's changed in terms of how you may advance the business.

Well, let me answer this another way because I -- I mean, we knew we had a problem with sales, with the Ocular's Biomedics. We knew we had that problem. Trying to identify where the (Expletive) problem was, was a problem. The only way I could figure it out was my God we've got one source of data. We all use in the industry to try to figure out do we really have a problem here? If silicone hydrogels, as some people might want to think, hurrying that product line, or, in fact do we have another problem? And when I looked, -- we went back and looked, my God two, year's worth of data. Of looking at both Ocular and Cooper's participation in the two-week disposable Sphere market. That's about 52, 53% of all office visits in this country, are for that product, we saw we didn't have a problem. We weren't losing market share. So what the (Expletive) else could it be?

And when I looked at that, the only thing I could come up with is we've got something else funny going on here. Which made us go back and look very deeply into some of the sales history of Ocular Sciences' two week disposable product by trade class, Chris. By trade class. And by doing that we have identified, my, gosh, this looks like there's something going on here. And in the meantime, if you recall, and I think you were following Ocular at the time, they were trying to manage their inventory of Biomedic Spheres down, because they wanted to introduce Biomedics Premier and move without having a lot of returns coming back. They wanted to manage that as much as they could.

I'm going to tell you apparently it wasn't executed too well and by the way that could be a problem that those good old folks at Vistakon might have too. Trying to move people into Acuvue Advance, you have got Acuvue two out there. I don't know if they're going to have a very similar kind of problem. But the point is it's hard to put those together, especially when you are trying to stock product in the doctor's office. So after doing all of that, we thought we had a pretty good handle on how much excess inventory we had, and we started to mess around with our guidance. Because when you looked at the sales, we knew that the sales weren't going to come in but we knew exactly where it was. We knew it exactly was the two-week products from Ocular Science and we knew it was in the U.S. and it sure in the (Expletive) wasn't our other products. They were doing very well and I think you can see it in the way we have reported it.

So after doing all of this I have looked at it and I said, you know, I think we -- we being at CooperVision, during 2004, were doing a pretty good job and the good old folks at Ocular because that's where we, at CooperVision were taking market share. We were taking market share away from the Company we bought. But if you put the two together, there's no doubt, there was no impact coming from any one of the other three players in the market in that market segment, when you looked at Cooper and Ocular put together. So that is very clear, so by doing that -- there's been a couple of questions here and how comfortable I am, how confident I am. We are more confident. I hope to God it isn't any worse than this. Because the rest of our business is going to grow. We are going to get through this. We are going to get through this because we are not going to give up market share in the disposable Spherical market in the U.S. You better understand that.

ProClear is doing very well, good neighbors. Believe me it's doing well and we've got clinical data that our salespeople use comparing ProClear against the two silicone products and we do perform extremely well in the area that is most important for contact lens wearers, as well as practitioners and that's visual acuity and coverage. That's what's important. So saying all of that, I hope that helps clear up exactly what we're up against and what we are trying to get our arms around. We think we finally have it. I wish to God I had it for Peter, for everybody else the 1st, of May. Apparently I didn't have it, but we think we have it now. I'm not shouting too much, Chris. Are you there.

I'm here. Can you hear me okay, Tom.

Yes, I hear you.

The take away from that would be you are still managing the business the same way you did in the past and so there's not been a change in what you expect you need to have in the channel going forward from an inventory level. If I heard you correctly there? And then just two quickies if I could. One, on the surgical side, maybe the easiest way to answer it, could you tell us what is not included going forward and that kind of promoted products category that you referenced there or I should say that Bob referenced?

Could you repeat that again, Chris.

The promoted products are not non-core if you will..

Right. I'm just trying to get a feel for, the 4 to the 9%.

Yes, the products that are non-promoted, I mentioned the sexual abuse products which are sold to the government.

Right. But ex those, I mean those are kind of like one-time items, pretty high ASP, any of the more frequent disposable products as well?

Well, there's cardiovascular dopplers which we obviously don't fully sell into that market or have representatives in that market. There is DI products and there's some other nonmedical products that are in the pot that we've got from I forget which acquisition that was. I think the DEI acquisition. And there is -- in the hospital setting we actually have some -- a product called Vizcon which is used during surgery as a drug. So there's about 90% of our business that is actually for and promoted and about 10% that is not.

Got it. And then finally just on pricing, when you are looking at your pricing now, as a combined entity, on the vision side, due to the change at the retail, whether it be regional or national chain, or maybe it's outside of the U.S., are you seeing any changes relative to historical drops that you saw in the blended ASP or ARP for those products or historical trends still there?

No, I got to tell you, there's no doubt, looking at the data we got -- like I said, Chris, two or three hours ago, that it's going the other way. The -- if you look at the two-week disposable Sphere market, the ARPs are going up. Now that shouldn't surprise anybody because you have got a transition with a major player here going from Acuvue 2, to Acuvue Advance which has a premium, I believe, a list price premium of about 25%. Even though Ciba was not a major player in that market before the energies -- I believe they had 8% market share. There was a substantial increase in ARPs in that market too. So you flush all of that through, and, in fact, what you see, you see an increase in overall value in the marketplace as it relates to revenue for a patient -- I think that's what your question was about.

I apologize. I will get back in queue after I clarify this. But just in terms of like the private label business. I understand that you're going to need the premium as we see the slip in hydrogels convert the old commodity business and you have a higher specialty mix in the marketplace. But I'm thinking about like a private label contract. As those come through -- are historical pricing trends there consistent, any better stability, greater downturn? I'm just trying to get a feel for general trends there.

It's about the same it was.

There hasn't been any meaningful trends, I don't think in that arena for many, many, years and there's no reason to think that there's going to be a major shift in the way private labels are handled in the marketplace.

Fair enough. Thank you.

Thank you.

Well, thanks, everybody, for participating. We are well past our traditional Q&A period, and please use that number I gave you to call in after the call. We don't want to hold anybody beyond this. Thank you again. We'll see you next quarter.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.